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[answered] AC 331 Federal Tax Problem This problem will serve as a gra


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AC 331 Federal Tax Problem

 

This problem will serve as a grade for AC 331. This problem is due Friday, December 2 by 4:00 pm.

 

Your client has filled out the information booklet that your accounting firm provided for preparation of the

 

client?s income tax return. Please read the following statements and prepare the client?s Form 1040 based on the

 

following information. If the statement requires no action, please comment in your separate explanation sheet.

 

Crystal and Christopher Carpenter have been married 22 years and are 55 and 57 respectively. Their address is

 

2401 Cherokee Drive, Butler, Alabama. They have 3 children, Tim SS#444-55-666, Pam SS#999-66-555, and

 

Lauren SS#333-22-1133.

 

Tim is 23 and a full-time student at a local college. He lives in an apartment, but parents paid $14,250

 

.

 

in school costs and $12,000 of his living expenses. He works part time as a pizza deliveryman and made

 

$4,200 delivering pizzas.

 

Pam is 35 and has no his income of her own. She is handicapped and so she lives with her parents. She

 

does not provide more than half of her support, but she does make $4,200 working as a teacher?s aid at a

 

school for special needs children.

 

Lauren is 18 and works as an actress. She has done this for several years, making $150,000 a year.

 

However, her parents have placed all of her income in a trust account, and Crystal and Christopher

 

continue to support her. She does not live at home, except during holidays.

 

1. Crystal is a retired school teacher who receives $1,800 in retirement benefits each month. Her

 

retirement benefits are 100% taxable. Crystal had $2,700 in federal income tax withheld from her

 

distribution each month. She does not have state income tax deducted from her retirement benefits.

 

2. Crystal is also self-employed selling AdvoCare nutritional supplements and had $35,000 in sales last

 

year. Her product costs were $21,000 and she incurred supplies expenses of $800. Crystal has a cell

 

phone that she exclusively uses in her business with a monthly payment of $110. She also paid $275 for

 

business cards and flyers to market her business. Crystal also purchased a new car for $36,000. She has

 

determined that she will use the car 65% for business delivering AdvoCare products and taking orders.

 

She is interested in getting the most deduction she can get in the first year. (Remember that the

 

depreciation limit for cars is not increased for the 179 expense.) She does not elect Section 179

 

treatment. Please show the depreciation on the appropriate schedule with the other business expenses.

 

You do not have to prepare the Form 4562, but please show the depreciation calculation on a separate

 

sheet of paper.

 

3. Crystal paid $1,600 in federal estimated income tax for her AdvoCare business. She also paid $560 in

 

state estimated income tax.

 

4. Crystal bought a new computer for $2,600 in March 2016. She used the computer 20 hours a week for

 

50 weeks during the year to complete order forms, check e-mails from the company, send out reminders

 

and prepare reports. She was used by everyone in the family, including her business use a total of 35

 

hours a week for 50 weeks during the year. Calculate the depreciation on the computer and deduct the

 

appropriate amount. Show your calculation on a separate sheet of paper and enter the depreciation

 

amount on the correct schedule with the other business expenses.

 

5. Crystal uses a desk in the playroom to complete the paperwork for her business, and she also stores her

 

inventory in the room. While AdvoCare customers don?t come to Crystal?s home office, the room is not

 

used for anything else except Crystal?s business. She has no other office. If Crystal should take a home

 

office deduction, add the appropriate amount of expense to the rest of Crystal?s self-employment

 

expenses. The playroom is 445 sq. ft, and the entire house is 3,500 sq. ft. The electric bill is $325 per month, the gas bill is $90 per month, the internet bill is $110 per month (30% business), and the water

 

bill is $55 per month. Crystal uses a cleaning service that comes twice a month to clean the entire

 

house. She pays the cleaning service $150 for each visit. Crystal deducted Section 179 expense for the

 

office furniture when she started selling AdvoCare in 2014.

 

6. Christopher is a principle at the elementary school. His salary is $82,000 a year. Christopher had

 

several expenses that were not reimbursed by her employer.

 

-He was required to belong to the Alabama Educators Association and the Principles of Alabama, which

 

are education related organizations. These memberships cost $825.

 

-Christopher was required to attend three continuing education meetings in Montgomery, Birmingham,

 

and Mobile helping him learn new math teaching techniques. His total mileage for the three trips is 800

 

miles. The fees to attend these meetings were $225 each. He spent the night before the conference in

 

Mobile, spending $130 on the hotel room and $80 on meals for two days. He also stayed in a hotel

 

before the Montgomery conference, paying $140 for a hotel room and $65 on meals for two days.

 

Christopher stayed with a friend in Birmingham and ate all of his meals at his friend?s house.

 

-Christopher?s school provided an in-service program for its teachers the week before school started in

 

August 2016. Christopher provided lunch for the 40 teachers and staff members at his school which cost

 

$1,200. Christopher was only reimbursed $400 by his employer. (Assume that these expenses are

 

directly related to his employment.)

 

7. Christopher had $22,000 withheld from his paycheck for federal income taxes. He also had $4,500

 

withheld for state income taxes.

 

8. The also received $9,120 in interest income during 2016 from their CDs At Local Bank, $200 in

 

interest income from their savings account the Alabama Credit Union, $4,500 on University of West

 

Alabama (a state university) bonds, $8,450 in interest from Dell Corporation bonds, and $2,475 in

 

interest from US Treasury bonds.

 

9. The Carpenters bought an apartment duplex in 2014 and made it available for tenants in April 2014.

 

During 2016 the fully furnished apartment duplex was rented all 12 months with no personal usage by

 

the Carpenters. They collected $15,600 in rent during the 2016 year. They paid $645,000 for the duplex

 

and spent $55,000 renovating the facility. During 2016 the electric bill was $375 a month and the gas

 

bill was $225 a month. The maintenance cost on the building was $150 a month and the cleaning bills

 

are $600 a month. In addition, the Carpenters paid $3,275 in real estate taxes, $2,875 in insurance, and

 

$3,525 in mortgage interest during 2016. During 2016 the Carpenters paid $3,575 to replace the carpet

 

in several rooms and $1,280 to have one of the apartments painted inside.

 

10. The Carpenters own a vacation home in the Smoky Mountains. They rented their vacation home for the

 

months of September and October 2016. They received rent during the year of $5,600. The expenses

 

incurred with respect to the house were real estate taxes of $4,350, insurance $800, maintenance fees

 

$1,200 and mortgage interest of $6,000. Utilities totaled $6,000 during 2016, and they paid a cleaning

 

service $250 each time they came to clean, 20 times during the year. They actually stayed in the

 

Gatlinburg, Tennessee home during November and December, enjoying both Thanksgiving and

 

Christmas in the mountains. Crystal and Christopher bought the home in October 2012 for $350,000.

 

Use the Tax Court method to allocate the expenses.

 

11. Crystal contributed $5,500 to an IRA. She is not eligible to participate in an employer?s retirement plan.

 

Christopher is covered by his employer?s retirement plan. He did not make an IRA contribution.

 

12. The Carpenters and their dependents had the following in medical costs during 2016. They paid $425

 

per month for health insurance premiums and $160 per month for dental insurance premiums. Crystal ? Copays from doctor visits $35/visit with 9 visits, $2,500 for lasik eye surgery to improve her

 

vision, $4,200 for surgery to her eyes to eliminate the lines around her eyes, making her appearance

 

younger, personal trainer fees $400/month for the entire month so that she can lose the extra 25 pounds

 

she has gained, over the counter drugs costing $180.

 

Christopher ? Hospital fees for knee surgery $3,875, physical therapy copay $745, knee brace $120,

 

total mileage to and from therapist and hospital 525 miles. Dental expense for extensive surgery $4,075

 

and reimbursement for dental expense $2,500.

 

Lauren ? Six Botox injections to achieve the appearance she desires for her modeling career $1,000

 

each, copay for doctor visits for various illnesses - $35 each/8 visits.

 

Pam ? new wheelchair $550, new leg braces $885, trip to California to help with allergy symptoms in

 

spring 2016

 

Tim ? alcohol and drug rehabilitation clinic for 90 days ? insurance paid 30 days, 60 days paid out of

 

pocket $32,000

 

13. They paid $2,350 in mortgage interest on their home. They also paid $625 in interest on a car loan.

 

During 2016, they also purchased a boat and various water toys and spent $32,000. They opened an

 

equity line of credit on their principle residence to facilitate these purchases and incurred $1,600 in

 

interest on the equity line.

 

14. Christopher was put on a temporary unpaid leave of absence from his job for several months during

 

2016; he collected $2,800 in unemployment compensation. He was reinstated before the end of 2016.

 

15. While on the leave of absence, Christopher spent a few days in Las Vegas. He won $5,500 gambling.

 

He calculates that he lost approximately $8,950 gambling.

 

16. They also paid real estate taxes of $1,835 on their principal residence, sales tax of $82 on a new

 

refrigerator, and $565 for their car tags. The personal property tax portion of the tag cost was $240.

 

17. The Carpenters contributed $12,500 cash to Christ Episcopal Church and clothing with a FMV of $750

 

and a basis of $2,400 to the Salvation Army. The Carpenters chose to give a vacant lot valued at

 

$75,000 to The University of West Alabama on December 5, 206. The Carpenters purchased the lot in

 

2005 for $55,000. The lot will be sold by UWA for a scholarship fund. The Carpenter?s also helped

 

several individuals with their personal projects. The neighbor?s children were raising money for their

 

mission trip, so the Carpenters gave them $25 each for spending money on the trip. In addition, the

 

Carpenters friend died in a tragic accident. They contributed $1,000 to a fund at Regions?s Bank to help

 

the friend. They also have a friend whose child is having a bone marrow transplant at the Mayo Clinic

 

in Minnesota. They contributed $500 to a fund at BBVA Compass Bank to help the family pay for

 

travel expenses.

 

18. The Carpenters each received a $14,000 gift from Grandmother Carpenter during 2016. Grandmother is

 

very wealthy so she is trying to distribute her wealth before she dies.

 

19. Christopher inherited a piece of unimproved real estate from his father who died in 2006. Christopher?s

 

father paid $35,500 for the property when he purchased it in 2005, and the property was worth $82,000

 

at his death in 2006. Christopher prepares the land for use as a commercial office building site. His

 

costs for this work are $26,000. He sells the property for $125,000 in 2016. 21. Crystal received stock as a birthday gift from her millionaire cousin in 2016. The cousin paid

 

$3,000 when she purchased it on September 30, 2011. The stock was worth $3,500 at the time of the

 

gift. Crystal sold the stock in October 2016 for $4,000.

 

22. Crystal and Christopher received dividends from the following sources: Highland Ridge Bank $8,600,

 

Power Company $1,255 and XYZ Manufacturing, Inc. $1,225. These are all qualified dividends. You

 

need to calculate the tax on these dividends separately.

 

23. Christopher started a lawn care business in March 2016. He had contracts for 35 lawns. The lawns were

 

maintained once a week for 28 weeks at a price of $150 a yard. He rented a small office for $400 a

 

month for 10 months and paid two students $6,000 each as W-2 employees to mow the lawns.

 

Christopher paid $848 in FICA taxes for each employee. He also purchased a desk, 4 chairs and replaced

 

the carpeting in the office in June 2016. The cost of the desk was $900; the chairs cost $360 each, and

 

the carpeting $2,500. In July he also purchased two large mowers for $6,500 each, two small push

 

mowers for $1,000 each, two weed eaters for $1,500 each, and three blowers for $500 each. Christopher

 

also bought a new John Deere tractor to mow several of the large estate lots at a cost of $16,500. All of

 

the items purchased were new and not previously used. His business will have a 12/31 year end. In 2016

 

the business will have a short tax year. Please calculate the depreciation, showing your work on another

 

sheet of paper and turn in this sheet of paper with your return. Use the depreciation totals to calculate the

 

income for the business.

 

Instructions:

 

Prepare the return on a 2015 Form 1040. (You will use some 2016 schedules.) This includes calculating the income tax and the

 

self-employment tax. Use the 2016 income tax schedules, exemption amounts, and standard deductions. Pay close attention to

 

filing status, dependency exemptions and where each item should be reported on the return. Please provide explanations for

 

standard deduction and exemptions.

 

Also, provide a separate sheet with the depreciation calculations. Provide a discussion of your reasoning for deducting or not

 

deducting items that are at issue (home office). You may talk to each other about the problem, but I strongly advise that you do

 

your own work. You will benefit more by preparing your return and then comparing your answer with other students.

 

If there are limitations placed on various benefits the taxpayer might receive (for example, itemized deductions) because of the

 

taxpayers? income, please ignore the limitations. Calculate the taxable income without these limitations. However, if the limitation

 

on the deduction for rental loss applies, it should be applied. (This will only involve reviewing the taxpayer?s AGI.)

 

Please refer to your textbook, if you have questions. Chapter 14 may help you answer some of these questions. If you have

 

questions, please email me promptly so I can answer your questions as soon as possible.

 


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